As a goal of antitrust, the consumer welfare standard has borne unfair attacks, which we refuted in a previous article. In this second article, we explain how the consumer welfare standard, understood as a method rather than as a set of goals, enables antitrust authorities and courts to navigate the inherent ambiguities of the competitive process and facilitate procompetitive outcomes.
In a previous article, we refuted four common critiques of the consumer welfare standard (CWS). In this article, we argue that the CWS has key benefits which opponents overlook. Understood as a method rather than a set of goals, the CWS allows enforcers and courts to overcome fact-finding ambiguities inherent in competitive processes. Without the benefit of a consumer welfare standard as a yardstick, alternative frameworks such as “the protection of the competitive process” lack depth, are self-referential and, ultimately, arbitrary.
Framing the Conversation
What are we doing when we compare the CWS to other standards, such as “the protection of the competitive process?” We are essentially debating the universe of facts necessary to produce a finding of antitrust liability. Typically, the three elements that make up a violation of antitrust law are bad conduct, harm to competition, and a causal link between the two. Whereas the “protection of the competitive process” resolves this inquiry through a presumption that conduct which is likely to “substantially” reduce the number of competitors is bad and harmful to competition, the CWS asks whether, in addition to the other three elements, consumer interests have been harmed. This isn’t a frivolous fourth step meant to dissuade plaintiffs; instead, it is the best way of organizing those three basic elements into a coherent and consistent inquiry that identifies anticompetitive harms.
Specifically, the CWS explicitly acknowledges the difficulty in knowing, a priori, when conduct is “bad” (as opposed to “good” competition on the merits) and “harmful to competition” (as opposed to merely harmful to competitors). It injects an element of objectivity into what would otherwise devolve into a complex moral value judgment by asking a simple question: have consumers, who are the ultimate beneficiaries of competition, been harmed as a consequence of the impugned conduct, or not?
The consumer welfare filter is especially helpful in two settings, which are endemic in antitrust law:
1) When observable harms to competition do not correlate with welfare costs; or
2) When harms to competition are too costly to observe.
The benefits of a CWS filter
The first setting arises when reductions in competition do not translate into losses of efficiency or social surplus in the relevant market. Examples include digital markets with large network effects, capital-intensive industries like telecoms, and distribution agreements where restrictions on intrabrand competition protect retailers against free-riding and promote investment or employment relationships (such as how non-competes promote investment into specific skills). All of these instances restrict competition and result in “increased” concentration—at least to some extent. But that does not mean they are also “bad” and “harmful to competition.” In fact, they could all just as easily be an expression of competition on the merits. In this case, they are drivers of, rather than hurdles to, competition. Indeed, while in many cases, more competitors is better, driving inefficient business units, large or small, out of the market as a result of lower prices does not constitute an outcome that deserves prophylactic antitrust intervention.
The second setting concerns conduct or mergers that do not produce immediate or obvious effects on competition. Many, if not most, conduct typically covered by antitrust law, by any standard, falls into this category. Vertical and conglomerate mergers, transactions that remove small firms without revenue-making products from the market, certain vertical restraints like resale price maintenance, or even some horizontal agreements like information-sharing schemes, only conjecturally harm competition. They thus require a projection as to likely future outcomes to find (or refute) liability. For example, theories of harm based on input or customer foreclosure rely on conjectures about the merged firm’s post-transaction behavior. Only the CWS can provide meaningful targets for these projections.
In both settings, a CWS filter will tend to raise the confidence levels of antitrust decision makers. Claims that the CWS adds a costly filter to administrative and judicial application of antitrust law thus miss the point. This “costly” filter is not a frivolity, as it reduces the overall average costs of antitrust enforcement in the long term. The gains in decision-making quality borne from applying a CWS filter limit erroneous decisions and the subsequent likelihood of annulment and litigation—both of which are very costly. Only under a narrow vision of “costs” that does not take into account error costs and the costs of litigation and annulment does the CWS merely “raise costs.” The CWS might increase costs in an individual case for either or both of the parties, but these costs are made up for by the ensuing gains to the public from the system’s proper functioning.
In reality, the case for the CWS is conceptually the same as the case for a market power filter in abusive conduct cases: that is, a firm abusing its market power to produce anticompetitive effects. In general, excessive prices, discriminatory conduct, or unfair trading conditions reflect transaction or mobility costs that can coexist with free and open competition for entry. They only very faintly and ambiguously suggest harm to competition. In such cases, a market power requirement will filter out mere surplus transfers reflecting asymmetries in bargaining power or insignificant distortions in the level playing field, both of which represent the essence of the competitive process in all but name. Without a market power filter, abusive conduct cases blur the line between protecting competition and protecting competitors, since competition by definition consists in putting competitors at a disadvantage and, ultimately, in facilitating their exit from the market. Similarly, adding a consumer welfare filter allows decision-makers to reach more confident, and factually grounded, findings of liability, and to avoid type I errors, in which antitrust regulators or courts erroneously mistake procompetitive conduct for anticompetitive conduct.
The empirical facts of CWS
One of the most common questions about the CWS concerns the types of “empirical facts” which are admissible to guide the analysis of consumer welfare harms and benefits. The facts usually considered under CWS include price, output, innovation, and quality. We have doubts that “output,” as proposed by Herbert Hovenkamp, is and should be the main focal point in any and every antitrust investigation (conversely, see this earlier article in which the author entertains an opposed idea). The reason for this is that in a growing economy, output will tend to rise across markets with or without the restraint on competition, neutering antitrust enforcement. In fact, there is no reason why various types of evidence, like surveys of customer preferences for price, quality or choice or agent based models could not help establish an injury to consumers.
Yet another common question about empirical facts concerns whether we should wait for actual evidence of adverse effects on price, output, investment, or innovation to affirm antitrust liability. In other words, how do we apply the CWS when the effects of a merger or acquisition cannot be known for some time? The choice of allowing liability on the basis of potential, probabilistic, or incipient evidence of consumer injury depends on antitrust’s discount rate towards the future. The evaluation of the discount rate should be based on careful empirics, attentive to industry, geographic, and institutional specificity. Is the prospect of entry, expansion, or innovation in response to market power fast or slow? If slow, then antitrust law should adopt a high discount rate, and ensure that the future comes faster by selecting a standard of proof that allows the production of evidence of potential consumer injury to infer liability. But these questions of facts depend, in the first place, on our understanding of economic dynamism, technological change and the depth of financial markets.
The Objectivity of the CWS
Finally, a word on the “objective nature” of the CWS. Critics have often argued that the purported objectivity of the CWS—incidentally, one of its main selling points—is little more than a thinly veiled attempt to mask subjective preferences. In other words, there would be nothing objective about the CWS. This critique is more persuasive if the CWS is understood as a goal rather than as a standard, but it is much less powerful when the CWS is conceived as a method, as we argue in this entry. In addition, saying that the CWS is not objective is a truism, as no legal standard can pretend to perfect objectivity (and thus, to any objectivity, strictly understood). Instead, the objective nature of the choice and interpretation of legal antitrust standards exists on a spectrum, and the CWS’ conceptual congruence, measurability, and its connection to aspects that are almost universally considered to be relevant parameters of competition (price, innovation, quality) brings it closer to objectivity and further away from subjectivity. Conversely, standards phrased in terms of competitive process are a disservice to good antitrust law and policy, because these terms lack definitional accuracy and conceptual clarity. The competitive process may well be protected under conditions that preserve a certain number of competitors in the relevant market. But the competitive process may too be protected under conditions in which a single winner takes all on the merits of their business. In the latter case, a competitive process will correlate with the elimination of rivalry and situations of total monopoly.
When this is understood, a reasonably objective—though not entirely objective— standard, like the CWS, might be more useful than vague and unproductive standards like the competitive process.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
